Scaling Up and Running Hot
One of the main activities I accelerated during 2021 was working with early-stage startups on scaling their operations.
I had started “angel investing” several years ago, but decided to double down on it during this past year. I mainly work with firms I believe in and want to help, and use my investment to ensure that our incentives are aligned and that I also have some skin in the game. Some of the help I offer is within my domain of research (supply chain, last-mile logistics, gig economy) and some of it is within my area of teaching (scaling operations). I would not call myself an angel investor since this is definitely not my full-time job, and I am quite selective in the start-ups I choose to invest in.
But I also work with firms that I don’t invest in, sometimes joining as an advisor, and in general, I am always happy to listen and offer my advice to any aspiring entrepreneur or founder who I meet through my network (which primarily consists of former students, and their networks).
All this is to say that if you follow my newsletter for the supply chain posts, you may occasionally see one on “the challenges of scaling.”
A few weeks ago I met the founder and CEO of a very successful startup that was discussing how their employees were describing them as “demanding.”
The CEO (whose identity I will keep private) mentioned that their goal is to attain the right balance between keeping the startup hot (i.e., making sure that the firm keeps innovating and challenging itself), and recruiting employees and experts which may be looking for a better work and personal-life balance.
In other words, many of the employees, who are experts in the field in which the firm operates, are people that may not have joined the firm in its early days, but joined due to the success and valuation that came with it. Yet, the founder felt that the risk the startup is under is still quite sizable and success is much less guaranteed than what is implied by the valuation and the hype around it (all this is my free interpretation and not a direct quote from the CEO).
The founders themselves worked around the clock, but felt that it was not essential for others to do the same, as long as they “pressed forward” and kept “running hot.”
The question the CEO had was how to make sure that people understand the risks, but also don’t feel overworked or risk feeling “burned-out” (both for the early employees and those who join later).
As startups start to scale, this debate actually becomes quite common.
“Some of Spring Health's employees said they experienced a pressure-cooker environment in which they worked nonstop and under close scrutiny. Many told us they were worn down by what they described as a hard-driving, growth-at-all-costs approach by a young chief executive who appealed to their idealism with her startup's mission but at times seemed blind to their basic needs.”
What’s the cost of such an environment?
“That feeling fueled departures, these sources said. Spring Health, which had fewer than 100 employees when the pandemic began but now has 250, has seen more than 40 staff members leave since March 2020, according to interviews and LinkedIn data. At least 30 of those people quit or were fired within their first year, before becoming eligible to buy their first tranche of stock options.”
The fact that people are leaving before their options are vested is clearly a sign that they can no longer tolerate the situation.
If you are quick to say that this is already a sign of failure, it may be a bit too early to judge. I teach a case study about the state of Cloudflare after four key departures (when the firm was much smaller than Spring Health). The departures seemed to be a sign of problems, but the firm's successful IPO several years later, indicates that one should not immediately conclude that the departure of key employees is also a leading indicator of failure.
To be honest, nothing in the Business Insider article shocked me.
If anything, I was actually shocked that it was shocking to others. The challenge is quite natural when transitioning from early-stage startup to early-stage “scale-up.”
In the early stage, the team is motivated by the founders' vision. The founders usually hire new employees “in their own image,” strengthening cultural connections among the early-stage employees. Everyone is willing to pitch in and work hard since there is very little certainty about the outcome, and everyone feels that they have to pull their own weight. Since everyone is aligned and the team is small, communications are informal and decision-making is based on consensus or founder fiat, with no politics at play.
As the startup begins to scale, new employees are less likely to be mission-driven. It’s not that they don’t believe in the mission, but they are already thinking about their next job, and how their current job is going to help them get it. They are clearly motivated by what they perceive to be a much more “guaranteed” financial success. The new employees are also likely to be more diverse, bringing new perspectives, but changing the company culture in the process.
Friction arises between the “old guard” and the newcomers over behavioral norms, need for process, etc. This additional diversity and the debates over norms is a healthy transition, but it also introduces more politics, which becomes a growing concern.
The main theme, however, is that the leaders strive to maintain and, if needed, re-ignite the entrepreneurial spirit and avoid bureaucracy. This is hard.
“Due to” or “In Spite of”
When founders ask me whether they should keep running hot, the first question is whether the firm’s success is due to or in spite of running hot.
When I ask this question in class, it always ignites a very heated discussion.
My opinion is that in most cases a firm’s success is due to “running hot.”
Startups are difficult and their success is extremely rare. The only tools startups have against incumbents and inertia (or in other words, against harsh reality) is being fast and determined. And it’s hard to be fast if you don’t work hard or run hot, maintaining an always-on, work-first lifestyle.
Startups are a special type of organization that are trying to achieve two very hard things at the same time: innovate and execute. Mature firms can barely achieve one of the two.
Unless you work very hard, it’s extremely difficult to do both.
Are there firms that manage without the fast pace? Sure. But usually for a second or third-time entrepreneur, and even then, it is still very rare.
So if we agree that running hot is what brings or ensures success, does this mean that we need to continue at the same speed? Not so fast…(no pun intended).
The first step is to realize that running hot is instrumental.
The second step is to understand that running hot forever is not possible, and cases like Spring Health prove this.
So what can you do?
In the words of Ben Horowitz, you need to give ground grudgingly.
What does that mean?
It means that, as a founder or CEO, you first need to understand that handling issues around employee departures will require more structure. You will have to build and add processes.
These additions, however, will slow you down:
“There is a great analog to this concept in American Football. An offensive lineman’s job is to protect the quarterback from onrushing defensive linemen. If the offensive lineman attempts to do this by holding his ground, the defensive lineman will easily run around him and crush the quarterback. As a result, offensive linemen are taught to lose the battle slowly or to give ground grudgingly. They are taught to back up and allow the defensive lineman to advance, but just a little at a time.
When you scale an organization, you will also need to give ground grudgingly. Specialization, organizational structure, and process all complicate things quite a bit and implementing them will feel like you are moving away from common knowledge and quality communication. It is very much like the offensive lineman taking a step backwards. You will lose ground, but you will prevent your company from descending into chaos.”
But it is important to emphasize both terms: “give ground” and “grudgingly.”
I guess I belong to an older generation, but I feel that the moment you stop running hot, it is actually very hard to ignite things again.
As I usually say, there are no optimal solutions, only trade-offs. In the case of startups, it’s natural to grow from crisis to crisis. Experienced entrepreneurs anticipate these crises in advance and build the firm in a way that it can scale almost without interruptions. For the less seasoned entrepreneurs, it is important that they go through these crises, learn, and understand that they are not a reason to give up and not press forward.
Of course, Spring Health is a bit more complicated given the fact that it is trying to address mental health issues.
“The story of Spring Health illustrates a fundamental challenge facing the startup industry. To some employees, the always-on, work-first lifestyle that has long defined startups no longer seemed so alluring, or even sensible, when it stood in direct opposition to the prescriptions for happiness that their startup itself is selling.”
But the implications are similar: crises are an important part of the process and learning to navigate and overcome them may well become part of the solution.
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